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School

Ryerson University

Department

Economics

Course

ECN 440

Professor

Teresa Fung

Semester

Fall

Description

1/14/2013 7:16:00 AM
ECN440 - BOOMS, BUSTS, PANIS AND MANIAS
Week 1 – January 14
Growth and Business Cycles
Fluctuations is the pace of expansions of real production is called the
business cycle
Recession : Unemplyment
Expansion : Inflation
Market Bubbles
A cycle characterized by rapid expansion followed by a rapid contraction
Stock market bubble: a surge in equity prices, often more than warranted by
he fundamentals, followed by a drastic drop in prices as a massive sell-off
occurs
Shortage: D > S : Price increases
Surplus: D < S :Price decreases
Assets: Real (property, gold, oil) and Financial (stocks, bonds)
The expansion of bubbles is usually fuelled by the expansion of credit, driven
by excessive optimism (animal spirit/herd behavior)
A bubble involves a non-sustainable pattern of price changes
Manias Bubble involves the purchase of an asset, usually real estate or a security,
not because of the rate of investment but n anticipation that theasset or
security can be sold to someone else at an even greater price (greater fool)
Return = income flows + capital gain/loss
Mania describes the frenzied pattern of purchases, often an increase in both
prices and trading volumes
Bubble: increases in (asset) prices in the mania phase of the cycle
Virtually every mania is associated with a robust economic expansion
Economic Expansion:
Investors become increasingly optimistic and more eager to pursue profit
opportunities
Lenders become less risk-averse
Rational exuberance morphs into irrational exuberance
Euphoria develops  more investment and consumption
Speculation intensify:
increasingly large share of the purchases of these assets undertaken in
anticipation of short-term capital gains
Asset-Price Bubbles: Credit Driven
Credit boom drives up asset prices
Rise in asset values in turn encourage further lenders
Particularly Dangerous
when bubbles burst, asset prices collapse, loans go sour, lenders cut back on
credit supply 1/14/2013 7:16:00 AM
Week 2 – January 21
Financial Crisis
Types of Financial Crisis
 Banking Crisis:
o when some or all of the banks are threatned with insolvency
(assets